Indonesia's oil problem

WERE one told a decade ago that oil prices would quadruple but not seriously hurt growth in emerging economies, it would have seemed fantastic. (After all, the oil shocks of the 1970s substantially curtailed growth in Latin America). Yet this is precisely what has happened. As oil prices approach $100 a barrel, economists are wondering why.Jon Anderson at UBS has a note out this week titled, "Why Doesn’t Oil Matter?” with a few ideas. The most interesting one is the smaller role oil plays in energy consumption in emerging economies relative to developed ones. Roughly 40% of primary energy used in developed economies comes from oil, as against 28% in emerging economies. Coal is still pretty much king in developing economies, at 49%, whereas the equivalent figure is 20% in developed economies. For India and China, the reliance on coal—mostly domestically produced—is even greater, at 67%.But the "emerging" category conceals some radical differences across countries. Indonesia, for instance, is actually more oil-intensive than most developed countries, with oil at 47% of consumption. As a result, oil price increases hit Indonesia hard. Indonesia's uniquely high oil intensity is probably thanks to domestic production; the Southeast Asian country only became a net oil importer in 2003, and prior abundance left any notion of scarcity alien to industry and households.Dependence on cheap oil begins in poor households, which usually use government subsidised kerosene instead of gas (which is cheaper and simpler to use). "It is a total waste to cook with jet engine fuel", quipped Jusuf Kalla, the country's vice-president, in 2007, but poor Indonesians have struggled to make the transition to gas, which they perceive as more dangerous. In 2008, a 30% fuel price hike led to widespread rioting.read more

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Every now and then, the developed and emerging economies of the world find themselves in sync, growing or contracting together. This is not one of those times. In late 2015, a trend that started in 2014 accelerated, as the balance of global growth is tilting toward developed markets and away from emerging ones. Whereas Credit Suisse economists expect growth in developed economies to accelerate this year—up 1.9 percent versus 1.7 percent in 2014—they forecast slower growth in emerging ones, up 3.6 percent versus 4.3 percent last year.

It would take four Indonesias to match the size of the German economy, five and a half to rival Japan, and fully 19 to square with the U.S. GDP. But the world’s fourth most populous nation has in abundance something the world’s developed economies would kill for—youth. According to the World Bank, 50 percent of Indonesians are under 30. The proportion of elderly people in the population is also lower than in other large Southeast Asian economies. A large supply of young workers and relatively few retirees is widely regarded as a recipe for strong economic growth.

NEW DELHI: The Narendra Modi government is considering a "painless" revamp of the kerosene subsidy to complete the fuel pricing reforms that have resulted in significantly reducing the burden on the exchequer. A plan prepared by the Expenditure Management Commission (EMC) is being examined as one of many options, a senior government official told ET. Chief Economic Advisor Arvind Subramanian has been asked to evaluate the formulation, which acknowledges the need for subsidised fuel to the rural poor.

The Indonesian economy, now worth almost US$900 billion in nominal terms, has been among the world’s fastest-growing in recent years. However, economic growth has significantly declined and now stands at the lowest level in half a decade.
Indonesia’s main stock index has had its gains since President Joko Widodo’s election wiped out, with the IDX Composite at its lowest level in over a year. This trend has mainly been caused by disappointing corporate earnings and waning confidence in the president’s ability to bring about the quick change that was promised.

Joko Widodo, Indonesia’s president-elect, has a life story tailor-made for Hollywood. Universally known by his nickname “Jokowi,” the son of a timber salesman spent his childhood in a riverside slum. Having grown up in a home where timber put food on the table, Jokowi decided to make his living from the tables themselves, and started his own successful furniture company. In 2005, he was elected mayor of Surakarta, and became governor of Jakarta in 2012. He is, as they say, a man of the people.

The United States has overtaken Saudi Arabia to become the world’s biggest oil producer as the jump in output from shale plays has led to the second biggest oil boom in history, according to leading U.S. energy consultancy PIRA.
U.S. output, which includes natural gas liquids and biofuels, has swelled 3.2 million barrels per day (bpd) since 2009, the fastest expansion in production over a four-year period since a surge in Saudi Arabia’s output from 1970-1974, PIRA said in a release on Tuesday.

U.S. oil production grew faster than almost all other major energy players in the world last year, but some analysts believe the industry will not be able to maintain its blistering growth.
American oil production led by the Bakken and Eagle Ford plays hit 8.9 million barrels per day in 2012, 13.9% higher than last year – the highest ever in the country’s history, according to BP’s benchmark annual Statistical Review of World Energy.

A research paper by Eyal Dvir of Boston College and Ken Rogoff of Harvard suggests some interesting parallels between the recent behavior of oil prices and what was observed at the very beginning of the industry. I've been doing some related research on the history of the oil industry that looks into the events behind historical oil price shocks. Here I describe the first oil shock, which occurred a century and a half ago.